How To Buy Rental Property With An LLC: Everything You Need to Know
If you want to learn how to buy rental property with an LLC, you will have some important decisions to make.3 min read
How to Buy Rental Property with an LLC
If you want to learn how to buy rental property with an LLC, you will have some important decisions to make. The first thing you’ll want to consider is how you will hold title to the property. Remember that how you choose to hold title could affect what happens if one person dies, if a lawsuit occurs, or if the relationship of the LLC fails. If you operate a single-member LLC, then you need not worry, but if you are a member of a multi-member LLC, then you’ll have to take these items into consideration before purchasing rental property with the other members of the LLC. Be sure to ask your questions regarding what will happen if one of the members wants to leave the LLC, or what happens regarding liability if the tenant living on the rental property gets injured. Since property ownership is generally regulated by state law, you’ll want to know the applicable state laws in which your LLC operates. Therefore, it might be a good idea to find a legal professional who can help you determine what type of title your LLC should take, if any, before purchasing rental property.
Holding Property Through Your LLC
If you want to purchase rental property, then it might be beneficial to form an LLC to purchase such property. Keep in mind that an LLC, also referred to as a Limited Liability Company, protects its owners (members) from personal liability. This means that if your LLC is sued, your personal assets are protected. While forming an LLC might be beneficial for some, it might not be the best choice for all.
There are several circumstances in which an LLC can hold rental property, including the following:
• The LLC can be formed for the sole purpose of purchasing rental property
• A member of the LLC can purchase property and subsequently transfer or sell the property to the LLC
• The LLC can purchase property from another business
• The LLC can purchase property from an individual
If you do want to operate a single-member LLC for the purpose of purchasing rental property, you should first determine the costs associated with running that property through your LLC, as opposed to simply owning that property outright.
With that said, purchasing rental property through an LLC could be difficult, as a financial institution might be hesitant in providing a loan to an LLC, and could require that the property be owned in the individual’s name. If this is the case, you can purchase the property and subsequently transfer ownership to the LLC.
If you are a single-member LLC, then you won’t have to worry about potential issues with other members’ rights over the property. For multi-member LLCs, however, you want to ensure that you as a member are covered in terms of how the finances will be handled when transferring ownership to the LLC. Some states indicate that when you purchase a property, you will obtain a title insurance policy covering you for loss or damage sustained on your property, particularly if the property turns out to be claimed by someone else.
Furthermore, having title insurance could provide that you are the owner of the property free and clear of all other claims on that property. When it comes time to sell the property, the title insurance will not transfer to the new owner. Therefore, if you ‘transfer’ or ‘sell’ your property to the LLC, the title insurance policy will not cover your LLC after you sell the property. You’ll want to ensure that the other LLC members can’t sue you legally for any issues that might arise on that property in the future, or in the event that the LLC dissolves, and the other members claim ownership interest in that property.
If you do sell the property to your LLC, in some states you can use a quitclaim deed, meaning that your LLC will automatically obtain title to the property but will not have any rights to sue you if there are title defects. However, if you transfer the property to your LLC using a warranty deed, then the other LLC members have the right to sue you for title defects.
This scenario doesn’t just come into play if you are selling your property to your own multi-member LLC, but it also occurs if you as an individual sell your property to an LLC that you have no affiliation with.
If you need help purchasing rental property with your LLC, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5-percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.